Craig Pontey’s Blog – Key property indicators few negatives except affordability

I would like to continue last week’s theme of looking at key indicators that can and do impact residential markets, the first item being debt and in particular household debt.

Currently household debt is high at around $150,000 per person, but generally we all seam comfortable about that. Possibly because according to the World Wealth Report on average Australian’s wealth sits around $420,000 and is second only to the Swiss. And the ASX appears to be comfortably established at around 5400 points. But here’s the connection much of our wealth, close to 60% is held in real estate. So when house prices fall or even stagnate we get a little glum, and activity drops, but it’s very much the reverse when house prices are on the up and up.

The exception of course is that our affordability ratios are very poor, and for first homes buyers miserably so. So we can expect to see a lot of pressure mounting to do something about this, and in many areas very active investors are in the spotlight for possibly helping to lock our first time buyers. Socially this is an issue that should be debated, but for now the wider market feels energized and comfortable and so current activity looks set to continue. State and Federal Governments, might re-look at further direct assistance for first home buyers, but given how active the market is at present, that looks unlikely for fear of adding more demand to the market.

However the Federal Government’s promised tax review, due next year might aim to deliver some structural changes in the area that would be a more long-term solution, let’s wait and see.

There is also a connection with the levels of business and corporate debt when borrowings are linked to commercial real estate as security, and despite pockets of higher unemployment, and some tough times for traditional retailers, we are not seeing any sort of fall in commercial markets. In fact activity is very healthy.

Tied to this trend is the fact that the banks are doing very well, both from their business and personal customers. Bad debt provisions are being reduced, helping to increase profits and borrowing rules have responded becoming easier.

Despite the GFC local house prices never went into free-fall like they did in some other economies, in particular the USA, and Australians have never had the experience of negative value. The local market tends to remain remarkably calm and if the rate of new construction continues to improve this will aid the entire economy.

When looking at current trends and activity I think keeping some of these big picture influences in mind does help to frame a perspective on the daily headlines.